Any real estate property can have more than one secured loan taken out against it. The loan that is registered first is called the first mortgage, while the loans registered subsequently are called a second and third mortgage, respectively. Third and fourth mortgages are very rare.
Second mortgages are also referred to as subordinate loans because in the event of the loan going to default, the first mortgage is reimbursed before the second. Second mortgages are therefore riskier for the lender, which is the reason behind the high rate of interest that accompanies most second mortgages.
A second mortgage is not beneficial if a home was bought when mortgage rates were low. In this case, the homeowner may have no interest in refinancing the present loan. However, the need for a second mortgage can arise if property was acquired when rates were higher, or was bought with an adjustable-rate loan.
Under these circumstances, a second mortgage is a wise option. There is now a wide selection of second mortgage loans available to fit an array of needs.
Today, second mortgage interest rates are affordable and converting the equity or right of ownership of a home into a line of credit is now a possibility. This array of flexibilities allows homeowners to borrow against their property as and when required. However, bear in mind that in the case of a second mortgage, the house will be pledged as security for such a loan, requiring the homeowner to choose the best financial deal and keep the budget in line with his long term income.
The most important step in the procurement of a second mortgage is the evaluation of need. In other words, one must determine whether a second mortgage is really necessary. This need will help determine the interest rate that one should seek.
The need to ascertain affordability of any additional payments involved in a second mortgage is vital. This can be done using mortgage calculators. Once the need has been ascertained and the affordability accounted for, an appraisal becomes necessary. In fact, an appraisal is necessary for a second mortgage, just as it is for the first mortgage. The appraisal will determine the financial obligations, for both the borrower and the lender. These are the most important tasks which are made complete by a private mortgage insurance (P.M.I.) on the second mortgage. Although it is not compulsory to enquire about PMI from the lender, it makes good sense to do so.
Usually, there are three types of second mortgages:
A home equity line of credit (HELOC) sets a maximum loan amount on the sum total of the first and the second loan, which usually adds up to 75% to 85% of the appraised value. HELOC is an open-ended line of credit, as it facilitates withdrawal of money against it at any time. Moreover, HELOC allows the owner to pay the loan back within a set period, without the need to comply with regular monthly installments.